Grand Tour Co. does business in United States and Australia. Grand Tour Co. conducts a sensitivity analysis to check whether its cash flow is affected by changes in the value of the Australia dollar. Grand Tour Co.s sales revenue from U.S.A. is affected by the value of the Australia dollar. The higher the value of the Australia dollar the less competition from Australia firms, and the more products they can sell in U.S.A. There are three possible exchange rate scenarios for the Australia dollar: A$ = $.48, A$ = $.50, and A$ = $.54. A$ refers to Australia dollars. Premiers U.S. sales forecasts based on the three exchange rate scenarios is below.

Revenue from U.S. Business

Exchange Rate of A$ (in millions)

A$ = $.48 $100

A$ = .50 105

A$ = .54 110

Premiers sales revenues from Australia are expected to be A $600 million.

The forecasted Net Cash Flows for Premier Company are below.

The figures are in millions.

A$ = $.48 A$ = $.50 A$ = $.54

Sales

U.S. $100 $105 $110

Australia A$600 = 288 A$600 = 300 A$600 = 324

Total $388 $405 $434

Cost of materials

U.S. $200 $200 $200

Australia A$100 = 48 A$100 = 50 A$100 = 54

Total $248 $250 $254

Operating expenses

U.S.: Fixed $ 30 $ 30 $ 30

U.S.: Variable (20%

of total sales) 78 81 87

Total $108 $111 $117

Interest expense

U.S. $ 20 $ 20 $ 20

Australia A$0 = 0 A$0 = 0 A$0 = 0

Total $ 20 $ 20 $ 20

Net Cash Flows $ 12 $ 24 $ 43

1. Is the cash flow of Grand Tour Co. sensitive to movements in the exchange rate of the Australia dollar? Why?
2. Does Grand Tour Co. suffer from economic exposure, or translation exposure?
3. If Grand Tour Co. shifts some of its expenses from U.S. to Australia, will this reduce its exposure?